Retirement Planning in Montana

Two phases of retirement planning

Retirement has two stages. First you build savings while you work. Later you convert them into a paycheck, and errors in that stage are hard to reverse. A useful plan starts with a spending estimate, adds up dependable income such as Social Security and any pension, and then sizes the draw on savings to fill whatever is left.

Montana has a good share of people in that second phase. According to the U.S. Census Bureau, 2020 to 2024 American Community Survey, about 20.1 percent of residents are 65 or older, the median age is about 40.4, about 69.2 percent of homes are owner occupied and the median home value is about $375,800. Newcomers arrive from California, Washington and the Midwest for mountains, fishing and quiet, while long-time residents often stay in the place their family has farmed for generations.

How Montana treats retirement income

Montana has no general sales tax and no estate or inheritance tax, which makes a fixed income go further. It does tax income, though, using two brackets. Part of Social Security may be taxable by the state for filers above certain income levels, and lawmakers have widened the exemption in recent years. Pension and annuity income may qualify for a limited subtraction that shrinks as income rises. Withdrawals from traditional IRAs and 401(k) plans are generally taxed as income. Rules change, so confirm each year with the Montana Department of Revenue or a tax professional.

Federal tax matters just as much. Up to 85 percent of Social Security can be taxable federally depending on total income. A smart mix of withdrawals from taxable, traditional and Roth accounts can keep you below thresholds that raise the tax on benefits or Medicare premiums. Converting part of a traditional IRA to a Roth in the years before required distributions begin can lower the lifetime bill, but the conversion adds to income in the year it happens, so test it against both the federal and the Montana brackets.

Claiming Social Security

You can claim at 62, at full retirement age or as late as 70. Waiting past full retirement age raises the monthly check by about eight percent a year until 70, while claiming at 62 cuts it for life. The choice depends on health, other income and marital status. A married couple should look at both benefits together, because the higher earner’s choice also sets the survivor benefit. Ranchers and farmers with irregular income should check their earnings record at ssa.gov, since low-income years can reduce the benefit. Our retirement planning guide explains the basics.

Pensions for teachers and public workers

Montana teachers belong to the Teachers’ Retirement System. Most other state and local employees belong to the Public Employees’ Retirement System, with a defined benefit plan and, for some members, a choice of a defined contribution plan. Employees of the Montana University System in Missoula, Bozeman and Butte may join an optional retirement program instead. Request a benefit estimate before setting a date, ask about survivor options and learn how a higher monthly payment today affects a spouse later. Also ask whether you are covered by Social Security through the job, since that changes spousal benefits. Pension payments and the age at which you can retire without a reduction depend on hire date and service.

Healthcare when the hospital is far away

Medicare starts at 65. Original Medicare covers hospital and medical services with deductibles and coinsurance, and most people add a supplement or pick a Medicare Advantage plan plus a drug plan. In Montana the choice often turns on geography. Advantage plans use networks, and in rural counties the network may exclude the clinic you use or the hospital in Billings or Missoula where a specialist works. Check each plan’s list before you enroll, and compare total yearly costs and look past the premium.

Travel is a cost too. Dialysis, cancer treatment or heart care can mean repeated trips of a hundred miles or more, plus lodging. Build those into the budget. The state health insurance assistance program offers free counseling on Medicare choices. If you retire before 65, you need a bridge such as coverage through a spouse or the marketplace, and income levels determine subsidies.

Long-term care and Medicaid

Medicare covers only short skilled stays, not ongoing help with bathing, meals or memory care. Care at home, in assisted living or in a nursing facility can cost thousands of dollars a month, and in small towns there may be a waiting list. Montana Medicaid pays for care for people with limited assets, and it reviews gifts and transfers made in the years before an application. Options include savings, long-term care insurance, life policies with a care benefit and early planning with an elder law attorney. Ranchers face an added problem: land is an asset that may count, so talk to an attorney before transferring any of it. Our estate planning guide covers powers of attorney and health directives.

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Snowbirds and residency

Many retirees spend summer in Montana and winter in Arizona, Texas or Florida. That raises a residency question. A state can tax you as a resident if you keep a home there and spend enough days, and tax agencies look at where your driver license, voter registration, doctors, vehicles and mail are. Keep a log of days spent in each place, and decide which state is truly home. The choice affects income tax, but also probate, because a will and trust are drafted under one state’s law. Talk to a tax professional before you move your legal home.

Housing choices and property tax

A house bought decades ago may be worth far more today. Selling can free money, but local prices can leave downsizers with fewer choices. Retirees in Missoula and Kalispell often move to a smaller house or a patio home. Others stay and add features for aging in place, such as a ground floor bedroom. Owners who are older, disabled or have low income may qualify for property tax relief through the Department of Revenue, and the state has changed how primary homes are taxed compared with second homes, so ask how the new rules affect you. Filing deadlines are firm. Montana also has a reverse mortgage market, which can turn home equity into income but carries costs and should be reviewed with someone who is not selling it.

Making savings last

Think of savings as a bucket you drain slowly. Pulling out a small slice in year one and raising it with prices each year is a familiar starting rule, but a Montana couple with a paid-off house and a pension can often take more than one who rents and has only savings. Longevity counts too: a healthy 65-year-old woman may need money into her nineties. Parking a year or two of spending in cash lets you skip selling stocks after a drop, and a willingness to spend a little less in a bad year helps the bucket last. Our investing guide explains how stocks and bonds behave during retirement.

Leaving a ranch, a business or a home

Retirement is also when many Montanans decide how to hand off the family place. That may include bringing a child into the operation, a lease to a neighbor or a sale. A plan has to cover your income too: if a ranch is sold on an installment contract, the payments become your pension. Life insurance can equalize the inheritance, and beneficiary forms on retirement accounts need regular review. Under current federal rules most non-spouse heirs must empty an inherited retirement account within ten years, which can create a tax burden for them. Our life insurance guide explains how coverage can help.

Questions to ask a retirement advisor

1. How are you paid? Fees, commissions or a mix.
2. Do you run withdrawal and tax projections? Ask to see a sample.
3. How do you handle Medicare and care costs? The answer shows experience.
4. Have you worked with ranchers, teachers or public employees? Each has special rules.
5. Are you registered? Check the SEC adviser database, FINRA BrokerCheck and the Montana Commissioner of Securities and Insurance.

An example: a couple retiring near Great Falls

Consider Bill, 64, a retired Air Force civilian, and Carol, 62, a school secretary. They own a house worth about $320,000 and have $510,000 in retirement accounts. Bill has a pension and will collect Social Security, while Carol is in the Public Employees’ Retirement System. Their question is whether they can stop work this year. An advisor would add up the pensions, test several claiming ages for Social Security and work out what the couple can safely draw from savings. Bill’s Medicare starts next year, but Carol needs a bridge to 65. The numbers might show that Carol can leave at 62 only if the couple delays Social Security, or they might show a better path if she works two more years. Seeing both side by side turns a hunch into a decision.

Working longer or part time

A growing number of Montanans phase out of work rather than stopping on a single day. A rancher keeps checking cattle at 75. A nurse picks up seasonal shifts. A retired teacher works in a ski shop or fills in as a substitute. Earned income before full retirement age can reduce Social Security benefits temporarily, though withheld amounts are later credited back, so confirm the rules for your age. Work also delays withdrawals, which lets savings grow, and may give you access to employer health coverage until Medicare starts. Counting even a few thousand dollars a year can change how long your money lasts. Our budgeting guide shows how to track the new mix of income.

Using the low-tax years

The years between the last paycheck and the start of required distributions are often the lowest-income years you will ever have. That makes them a window for a Roth conversion, for selling appreciated investments or for taking an IRA withdrawal while the bracket is low. Montana’s two-bracket system and the federal brackets both apply, so a planner runs projections for each. Be careful with the Medicare surcharge, which looks back two years at income. Our investing guide explains how account types are taxed.

Frequently asked questions